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seminar in finance service Document Preview: FINANCE 81 FINAL EXAM? SPRING 2014 Name:_________________________ INSTRUCTIONS: Show all calculations where necessary;the final answer carries very little weight in determining your score for a problem. There are four questions? answer any three. Congratulations and best wishes to those who are graduating. (25 points) A bond has the following characteristics;(paid annually);If the market rate of interest is, determine the market price of the bond. (8 points) Determine the?duration? for the bond using the data found in part (a). (5 points) If the market rate of interest decreases to, determine the percent change in the price of the bond using the duration measure from part (b). (5 points) Does duration under-estimate or over estimate the percent change in bond prices for decreases in interest rates? Explain briefly. A graph will help. (5 points) (25 points) Suppose that firm XYZ has an unlevered cost of equity that is equal to and that the unlevered level of systematic risk is. The cost of risk-free debt is, and the firm has a debt-to-equity ratio of. The firm?s tax rate is. The return on the market portfolio is implied by the data in this problem. Use Modigliani and Miller Proposition II to show the cost of levered equity for the firm. (5 points) Use the CAPM to find the rate of return for unlevered equity,. (5 points) Find the firm?s levered systematic risk,, and then use the CAPM to find the cost of levered equity,. (10 points) Do the CAPM and MM Proposition II suggest the same thing about the relationship between risk and return? Explain briefly. (5 points) 3. (25 points) Firm ABC has debt with a face value of $40m (which could be considered to be the exercise price on call and put options on the firm). The standard deviation of assets is. The risk-free rate is currently... Attachments: Fin-81-Spring....doc

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